Astromet is financed entirely by common stock and has a beta of 1.0. The firm pays no

Question:

Astromet is financed entirely by common stock and has a beta of 1.0. The firm pays no taxes. The stock has a price-earnings multiple of 10 and is priced to offer a 10% expected return. The company decides to repurchase half the common stock and substitute an equal value of debt. Assume that the debt yields a risk-free 5%. Calculate the following:

a. The beta of the common stock after the refinancing

b. The required return and risk premium on the common stock before the refinancing

c. The required return and risk premium on the common stock after the refinancing

d. The required return on the debt

e. The required return on the company (i.e., stock and debt combined) after the refinancing If EBIT remains constant:

f. What is the percentage increase in earnings per share after the refinancing?

g. What is the new price-earnings multiple?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...